We Think Harbour-Link Group Berhad (KLSE:HARBOUR) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Harbour-Link Group Berhad (KLSE:HARBOUR) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Harbour-Link Group Berhad

What Is Harbour-Link Group Berhad's Net Debt?

As you can see below, Harbour-Link Group Berhad had RM33.7m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has RM256.7m in cash, leading to a RM223.0m net cash position.

How Healthy Is Harbour-Link Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Harbour-Link Group Berhad had liabilities of RM179.0m falling due within a year, and liabilities of RM51.1m due beyond that. Offsetting this, it had RM256.7m in cash and RM172.2m in receivables that were due within 12 months. So it can boast RM198.7m more liquid assets than total liabilities.

This luscious liquidity implies that Harbour-Link Group Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Harbour-Link Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Harbour-Link Group Berhad grew its EBIT by 177% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Harbour-Link Group Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Harbour-Link Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Harbour-Link Group Berhad generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Harbour-Link Group Berhad has RM223.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in RM123m. The bottom line is that Harbour-Link Group Berhad's use of debt is absolutely fine. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Harbour-Link Group Berhad you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.